Last year was a successful one for hotel investment and the momentum remains strong in 2018. While 2017 finished with many markets hitting all-time highs, in terms of operating-performance levels and valuations, the outlook indicates further performance and value growth in 2018. However, after three years of accelerated growth, the pace is expected to decelerate. As interest rates continue to rise, the increase in rates is also indicative of positive economic conditions — which translate into earnings growth for assets such as hotels. Hotels are a defensive-asset class, based on their ability to adjust rates — an attractive feature as costs rise. Hotels will continue to provide higher returns compared to other asset classes.

Another Strong Year
In 2017, total transaction volume approached $3.5 billion (including traditional single transactions, portfolios and redevelopment sales), making 2017 the third-highest-volume year over the last decade. Results were bolstered by the inclusion of IMC’s sale of the SilverBirch hotel portfolio in Q1 2017 — the closing of the transaction had been delayed from Q4 2016. Adjusting for this, overall investment volume was lower than 2016 ($4.1 billion), with 137 trades at a total volume of approximately $2.4 billion. This high activity level occurred despite continued weakness in energy-driven markets in Western Canada and Newfoundland, where trade activity has been limited. In contrast, investor interest in the major markets — particularly Metropolitan Vancouver, Toronto, and Montreal — was unprecedented. Gateway markets are at the top of everyone’s list, but there have been a limited number of assets brought to market. Investors in these markets have been rewarded with double-digit RevPAR growth over the last three years. Wherever assets are available, there is widespread interest and strong bidding.

The market continues to be dominated by domestic private buyers, but non-domestic investors have led the quest for larger assets and portfolios. With a reported $1 trillion in worldwide equity capital looking for a home, we expect to see continued offshore interest in larger-scale transactions. Smaller-scale domestic buyers are also benefitting from a high amount of capital looking for placement. Many private investors act as fund managers for pools of smaller investors or represent larger investors seeking diversity in their portfolios. This sector is the most active in the industry, driving the unprecedented demand for hotel investments.

Highlights from 2017
The largest transaction in 2017 was the sale of the 25-property SilverBirch portfolio to Leadon Investments — a Chinese-based private-investment group. Value of the transaction was $1.1 billion, accounting for a third of the total Canadian trade volume in 2017. Following the sale of the portfolio, the purchaser marketed seven of the non-core assets at a combined price of approximately $166 million ($112,400 per room).

In 2017, the number of single-asset hotel transactions (including redevelopment sales) was lower compared to 2016, decreasing from 133 to 128. However, the overall sale price per room for single assets increased to $175,000 per room, from $115,000 in 2016, due to high investor demand and an increase in upscale- and luxury-hotel transactions. This includes the Rosewood Hotel Georgia, The Westin Harbour Castle, The Thompson Hotel and the Trump International Hotel and Tower.

Inclusive of the SilverBirch sale, the Canadian hotel market saw a record 162 hotels change hands in 2017, with a transaction volume of approximately $3.5 billion.

REGIONAL REVIEW
Central Canada

Central Canada (Ontario and Quebec) continued to dominate transaction volume, accounting for 65 per cent of all national single-asset trades in 2017 — 78 transactions compared to 90 in 2016. Ontario saw the highest-level activity with 65 sales, including the Extended Stay Canada Ottawa ($36.3 million). In Quebec, there was a total of 13 single-asset trades. Most transactions occurred in secondary and tertiary markets, and consisted largely of limited-service and independent hotels.Transaction volume in Quebec was approximately $77.58 million ($79,000 per room).

Western Canada
British Columbia continued to report robust investment activity, accounting for approximately 23 per cent of aggregate single-asset trades, with 11 hotels transacting in the Greater Vancouver Area and the remaining sales in Northern B.C. and the B.C. Interior.

The Alberta and Manitoba markets reported improvement in investment activity with 13 transactions, representing nine per cent of aggregate single-asset trades.

Other than the sale of the Hilton Garden Inn Calgary Airport for $20.25 million ($150,000 per key), most transactions consisted of smaller limited-service or independent hotels in tertiary resource-based markets. Due to the continued weak operating results and slow recovery in the economy, most hotels transacted at low per-key values between $30,000 and $111,000. For the second consecutive year, Saskatchewan had no transaction activity.

Atlantic Canada
Single-asset hotel-transaction activity in Atlantic Canada saw minor improvement in investment activity with eight transactions in 2017, compared to six the year prior. Trades consisted of limited-service properties and were largely seen in New Brunswick. Two notable transactions occurred in Halifax, including the Atlantica Hotel Halifax ($24.5 million) and the Residence Inn Halifax ($17.5 million). A three-property portfolio transaction including the Hampton Inn and Homewood Suites and Delta Hotels Fredericton hotels sold for a combined price of $90 million.

Notable 2017 Transactions
There were a number of noteworthy hotel transactions in 2017. The 25-property bcIMC/SilverBirch hotel portfolio sold for $1.1 billion to Leadon Investment, while the three-property Westcorp Edmonton Boutique Portfolio (Matrix, Metterra, Varscona) was sold to DSOL Canada Ltd. for $61.15 million.

Pacific Reach Properties bought the 156-room Rosewood Hotel Georgia in Vancouver for $145 million — setting a new price-per-room sales record in Canada.

The 1,372-room Sheraton Centre in Toronto sold for $335 million to Thayer Lodging, making it the largest single-hotel transaction in Canadian history. Finally, the 105-room Thompson Toronto Hotel was sold to Mohari Canada Inc. for $77 million.

Although prices were not disclosed, the sale of two iconic Toronto hotels — the Westin Harbour Castle and the former Trump hotel — also occurred in 2017.

INDUSTRY OUTLOOK
Capitalization rates continued to decline through 2017, particularly in the southern-B.C. and central-Canada markets. Where assets were available, multiple bidders pushed returns to historic lows. Hotel returns still provide a premium over other asset classes and the spread between Bank of Canada rates and cap rates is still comparable to historic levels. In Cushman & Wakefield’s November 2017 Hospitality Outlook, a review of leading indicators suggests continued revenue growth in the hotel sector through 2018. While growth will be uneven, results in all areas of the country are expected to improve this year. Markets such as Alberta, Saskatchewan and Newfoundland will see growth this year.

Based on transactions in process and new offerings in the market in the first month of 2018, the year is off to a strong start and we see a continuation of the strong investment activity from 2017.

InnVest marketed a portfolio of 12 hotels in 2017, which was expected to close in Q1 2018. Also in Q1, three smaller portfolios came to market in Alberta and Saskatchewan as performance in those markets begins to show positive signs. In terms of larger offerings, expect to see closings of major assets in Montreal and Halifax in Q1 2018 — the largest being Cushman & Wakefield’s offering of the Westin hotel in Calgary, Edmonton and Ottawa, with a $500-million offering.

The outlook for earnings growth is less optimistic compared to the last three years, given the recent run up in RevPAR in many markets, as well as rising costs. The prospect of higher interest rates and record-high prices will deter some longer-term and experienced investors. For those in the market, hotels will still yield comparatively high returns and, in the event inflation rises due to wage increases and higher interest rates, hotels will provide a hedge for investors.

Activity is expected to remain strong in Central Canada and in the southern-B.C. markets, but expect to see increased buyer resistance to high prices. With economic growth expected in Alberta and Saskatchewan in 2018, those markets will present an opportunity for value investors.

Curtis Gallagher is vice-president, Hotel Investments, National Hospitality Services with Cushman & Wakefield; Brian Flood is president and practice leader, Hospitality and Gaming, Valuation & Advisory at Cushman & Wakefield in Toronto

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